How a Reform of the Brazilian Fiscal System could Reduce Social Inequality

By Alexandre Doré

21st-century Latin America is becoming somewhat of a laboratory for the concept of social justice. The attempt at a new Chilean constitution, the social pact of Gustavo Petro in Colombia, and the reelection of Lula in Brazil are all examples of the demand for this utopian concept creating a more egalitarian society in which the labour of the working class will be rewarded through fair redistribution, increased societal inclusion and democratisation of human rights. The continent is not at its first attempt at fighting social inequalities. Indeed, at the beginning of the 21st century, the important electoral success of progressive candidates across Latin America led to the designation of this period as a pink tide. These political actors took advantage of the constant growth of their countries, explained by the surge in demand for raw materials caused by the Chinese production capacities, to promote economic redistribution and to defend social progress.

View down from the top of Rio de Janeiro Rocinha favela, Brazil. Inequality is high in Latin America and perpetuates across generations. Photograph: Alamy

At the forefront of this first pink tide was Luis Iniacio Lula da Silva, of the Brazilian worker’s party. Elected in 2003, his first and second terms were marked by a reduction of malnutrition by 70% and of infantile mortality by 44% making him the 2010 UN champion of the fight against world hunger. While his positive record in terms of fighting social inequality speaks for itself, Lula’s reelection in 2022 and his now third mandate in power will probably not signify the return to social victories many foreign observers expect.

Indeed in the years to come Lula will have to concentrate on reversing economic stagnation and general lack of growth of the Brazilian economy. The country has the lowest GDP growth among BRICS countries and the OECD predicts a sharp decline of Brazilian growth. The country has already suffered a decline from 2.8% to 1.3% from 2022 to 2023. The Brazilian president also faces political difficulties as he lacks a clear and defining majority. Indeed as the protest following his election showed, the former right-wing president Jair Bolsonara is still popular, and more importantly powerful. Indeed his control of the chamber of representatives will force Lula to seek constant compromise with the opposition. Bolosonaro’s overwhelming support within the army also endangers the ground he stands on. Making his task in terms of fighting social inequality incredibly difficult compared to his first mandates.

The president can therefore not rely on traditional social policies which will be boycotted by the opposition. Solutions to social inequality therefore need to be found in a political middle ground and in the optimization of current systems to be as politically mainstream as possible.

This is why the president should turn his attention to institutional reform to optimise the country’s institutions and particularly to the country’s income sources. His main focus should be the Brazilian tax system which is deeply unequal. Indeed there is an “inverse relation between tax rate and taxable income”. This means consumption tax is generally higher for the poorest populations, a phenomenon which is incredibly unfair as the poorest population spends a higher proportion of their available income on consumption. This is quite evidently an unfair system and rare if not unique in OECD countries.

Additionally, the current system also suffers from a lack of transparency. Information surrounding the means of collection of public funds is hard to come by which acts as a barrier to entry for foreign investment. Indeed foreign investors are deterred from investing in the country due to the lack of availability of reliable information surrounding private companies' taxation. This lack of transparency is also the reason the state of the Brazilian tax system is as disastrous as it is, as the topic is rarely present in mainstream media which do not have access to precise information on the topic.

Therefore Lula’s government needs to prioritise a reform of the Brazilian taxation system. The priority consists in modifying the current composition of taxes by reducing the amount of consumption taxation and increasing direct taxes such as taxing wealth and inheritance which is the case in most developed countries. Indeed this will prove to affect poorer populations less while increasing general revenues for the government. Additionally, efforts will have to be made to promote a more transparent system, to bring the topic to the forefront of political discussions and to attract foreign investment.